Medicare rise to fund disability scheme

The federal government has settled on a $3.2 billion, 0.5 percentage point increase to the Medicare levy to help fund its National Disability Insurance Scheme and is expected to make an announcement on Wednesday.

The Australian Financial Review understands the government’s expenditure review committee, and then cabinet, considered several options on Monday, including an increased Medicare levy, a separate NDIS levy and a straightforward incremental increase to marginal income tax rates.

Sources on Tuesday said the favoured option was to increase the 1.5 per cent Medicare levy to 2 per cent.

Based on present numbers, the increase would raise $3.2 billion a year, or about 40 per cent of the estimated $8 billion in extra annual funding the NDIS would require by the end of the decade when it is fully operational.

A 0.5 percentage point increase would mean an extra $750 a year for someone on an income of $150,000.

The remainder of the extra $8 billion will be found by structural savings to the budget, including cuts to the disability support pension. Industry speculation was rife that Prime Minister
Julia Gillard
would make the announcement in Melbourne on Wednesday.

Pre-election brawl with opposition

Any tax increase will spark an immediate pre-election brawl with the federal opposition, which on Tuesday reiterated its support for an NDIS but not a new tax to fund it. Opposition Leader
Tony Abbott
said a Coalition government intended to fund the scheme from consolidated revenue.

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But the government is expected to legislate the tax increase before the September 14 election and introduce it on July 1, 2014, forcing the opposition to go to the election promising repeal it if it wins government. This timetable is despite the fact that the increased funding raised by the tax increase is not strictly needed until the 2017-18 financial year, after the expiration of the three-year NDIS trial period, funded in last year’s budget with $1 billion.

Speaking during his annual charity bicycle ride, Pollie Pedal, which is ­raising money for Carers Australia, Mr Abbott said a strong economy, not a new tax, was needed to “make the NDIS a reality’’.

“With a strong economy, we can ensure that government revenues are in a position to sustain over the long term an NDIS,’’ he said. It was “just not good enough’’ that the government was contemplating a tax rise.

“Now the government is coming after you, the people, for more money, because it can’t get its finances under control,’’ Mr Abbott said.

The existing 1.5 per cent Medicare levy is budgeted to raise $9.7 billion this financial year.

Most people pay the full 1.5 per cent. Those earning below $19,404 do not pay the levy and those earning up to $22,828 pay only some of the levy.

Take a Labor approach: PM

Seniors and pensioners generally have to earn more than $30,000 before they start paying the levy and do not pay the full levy until their earnings hit about $36,000.

Figures released by the Australian Taxation Office on Tuesday show 8.6 million people paid $8.6 billion in Medicare levies in 2010-11.

On Monday, when flagging the levy and other budget cuts, Ms Gillard indicated the thresholds would apply to any NDIS-related increase and those on higher incomes would bear the brunt.

“We will take a Labor approach to the burden sharing that I have described,’’ she said.

“A Labor approach which understands that people come with different capacities to the task, but also a Labor approach that understands that if we look right across our society and ask everyone to make some contribution, then it lightens the load for everyone.’’

The government fell largely silent on Tuesday, hoping disability support groups would drive public support for the pre-election tax increase.

But with the political parties divided over funding, the disability support community, which wants the NDIS delivered by whoever is in power, was also split.

People with Disability Australia spokesman Craig Wallace supported a levy as the best way to give long-term security to disabled people.

Even partial levy important

“The fact is we’re heading into a really tight fiscal environment," he said.

“What a levy does is provide a sustainable way to pay for reform."

Mr Wallace said even a partial levy, such as that to be announced on Wednesday, was important to provide a guaranteed funding base.

But former NSW Labor minister, John Della Bosca
, now the national campaign director for NDIS advocacy group Every Australian Counts, said the funding decision was one for government and his group was agnostic on the issue. But he said a properly and securely funded scheme would save everyone money over the long term.

Australian Lawyers Alliance president, Tony Kerin, supported a levy and believed most Australians would be prepared to fund the NDIS either through a levy or an increased GST.

Ms Gillard flatly ruled out touching the goods and services tax on Monday.

Finance Minister
Penny Wong
furthered the case for a hypothecated levy, saying: “You have to look at what will give security to people with a disability, what will ensure a strong scheme, not just for a couple of years but for the decades ahead.’’

A 2 per cent Medicare levy effectively increases marginal tax rates by the same amount, giving Australia a top tax rate of 47 per cent and a bottom rate of 21 per cent.

Newman offer rejected

Such increases will be a significant departure from Labor’s now-discarded 2007 election “aspiration’’ to reduce and refine tax rates from four to three.

Back then, it said that by 2013, if affordable, it would reduce the tax rates to 15, 30 and 40 per cent. The 30 per cent rate would apply to incomes between $37,000 and $180,000.

In July last year, the premiers, in Canberra for a Council of Australian Governments meeting, offered to back Ms Gillard unconditionally and on a bipartisan basis if she imposed a levy for the NDIS.

But she rejected the offer led by Queensland Premier Campbell Newman, fearing a scare campaign from Mr
Abbott
about a “great big new tax".

“We will make the appropriate arrangements out of the Commonwealth’s budget without a new tax, income tax, to fund the National Disability Insurance Scheme,’’ she said at the time.

Former Liberal treasurer
Peter Costello
told the ABC’s 7.30 program on Tuesday both sides of politics should be shelving new spending promises because of the budget situation. This included the NDIS.

“I wouldn’t be introducing it in this form at this time,’’ he said. “The budget’s in deficit. To fund it, you’ll have to borrow more money.’’

South Australian Labor Premier
Jay Weatherill
, one of the first premiers to sign up to the NDIS, said it was up to the federal government how it funded its share.

The total cost of the NDIS is expected to be about $15 billion a year when it is fully operational. Of this, $8 billion is new money while the other $7 billion is the current annual contribution of the states and the Commonwealth towards disability services.

The states will hand over the money and the sole funding responsibility to Canberra.